Monday, 28 October 2013

Billy's Third Law: The Dangers of Falling in Love

Don’t fall in love with the business too soon.

It seemed like such a good idea at the time!
My explaining my last stock pick to my wife
When you are getting starting in business, you need objectivity.  You can fall in love later; once you have an idea that you are sure has a chance make a profit.  But if you fall in love too early, you lose all sense of objectivity and you cannot make a rational decision. 
People in love are irrational.  Consider family Christmas letters. My friends’ children all have all-star athletes, on the honour roll, work with the elderly in their spare time and are currently being considered for a Nobel Prize.  (Never let your own children read these letters – bad for their self-esteem.)  You never hear a mother say “My kid is the ugly one three in from the left.”  You see the point, love is neither objective nor rational.  Now in the world of family – this is (to quote Martha Stewart) a good thing. In the world of the entrepreneur – it is a bad thing. 
Do not misunderstand me.  You need real passion to run your business.  You just need to be rational in deciding which business to start.  It is a little like courting.  You take time to get to know each other.  See if you are compatible, and then fall in love and then get married.  I mean, it’s not as if you appear on a television show, compete for a multimillionaire and then get married to a complete stranger at the end of the show. (Well not again anyway!)
A woman asked me to help her and her husband with the financial plan for a franchise.  I have nothing against franchises, but I had never heard of this one so the brand recognition advantage was clearly not there.   On reviewing the sales estimates, which seemed high for a first year business, I asked her where these numbers came from. She replied, “Why from the franchisor’s sales representative.  He also told me that this was such a good location that if we didn’t buy it that he might just buy it himself”.  When I dared imply that she might trust a franchise salesman’s forecast she was insulted.   “How could I be so negative – how could I be so cynical?  What kind of entrepreneur was I?”  She had a real rant  In her heart, this was a ‘done deal’ and I was just raining on her parade.
She and her husband had fallen in love with this franchise.  She had lost all sense of perspective and could see the two of them working together in their small business and living happily ever after.  Eventually she and her husband purchased the franchise, financed by a loan co-signed by her parents.  She went out of business three months later.  I may be a smart-ass, but I am not an idiot. 

At the pre-start phase, I think that everybody needs to be an optimistic cynic!  You need to know where you are going, look realistically at how you are going to get there and what obstacles will get in your way!  Remember, you don’t cut off a toe to make a shoe fit; neither should you force a business concept which cannot work just because you hope it will work.  Remember the words of my friend and business planner Elizabeth Lake:
Hope is not a strategy.
Next week, we shall see the importance of love and passion in business.

Tuesday, 22 October 2013

Billy's Second Law: The Break-even


Starting a business without doing a break-even is like snowboarding out of bounds in the fog.  You might have the ride of your life, but there is a good chance you’ll wind up lost, injured or dead!

Everybody has a million dollar idea...that won't work!


Maybe it is the last vestiges of my education as a “math geek” or maybe it is just my general scepticism, but you really need to know what you need to do before you get started.  The best way to start, in my opinion, is to do your break-even.  Now to many this will sound like just some numbers oriented accounting crap that gets in the way of the creative soul of the entrepreneur.   Tough luck. 
I know what you are thinking, because I hear the same story over and over.  I had a friend (or relative, or acquaintance’s mothers sister-in-law’s next door neighbour) who didn’t do any of this accounting crap, and now they are rich.  Well, a girl I went to high school with won the $1,000,000 national lottery but I still don’t recommend lottery tickets as a part of a balanced investment portfolio.  Doing the break-even doesn’t mean your business will succeed or not succeed, but it merely tells you what it will take to succeed. Every business can succeed – but not every business will succeed. 

The break-even tells you how much revenue you need to generate to cover your fixed and your variable costs.  Your fixed costs are the costs to run the business – you know the overheads.  Overheads include telephone, wages, advertising, automobile office supplies and the like.  These are costs that you incur whether you make the sale or not.  Your variable costs, or your cost of goods, are the costs to make the product or to provide the service. 

I first learned about break even from my mother.  My mother was a nurse. She equated any purchase around the house to the number of shifts she had to work at the hospital.  If we asked for anything, Mom would ask, rhetorically of course, “Do you know how many shifts at the hospital I have to work to buy that?”  As soon as I learned to divide by $50 (a Registered Nurse’s take home pay at the time.) I just answered the question!  Do you know how many shifts at the hospital I have to work to buy you kids’ new skis?” “That all depends Mom – 3 shifts for the Élan’s, five for the K2’s with Solomon bindings.”  “Smart ass!” she replied.   (My mother is a bit of a smart ass as well.   After my loving tribute to her at her sixtieth birthday party responded by saying that birth control should be made retroactive.  Way to go Mom!)
It is crucial that you know what level of sales you need before you start the business. Once you know this level of sales, ask yourself these three questions:
  • Will my market support this level of sales? (Market Sufficiency)
  • Can I physically produce or provide this level of sales? (Practical Capacity)
  • Can I sell to at least this level of sales? (Sales Strategy)
If the answer to all of these is may just be on to something.  If the answer is no, then you may have to develop a new idea, change your prices, your costs or your market place. 

By the way, the break-even formulae are:

Break-even in Units =
Fixed Costs
(Price – Cost)
Break-even in Revenue=
Fixed Costs
Gross Profit %

By the way, the same analysis works for evaluating projects and new expenditures for an existing company.  Remember, it’s hard to succeed in business if you don’t know the target.  The break-even may not be the final destination, but it is certainly one of the steps along the way.
Next week, working along the same theme, I will post one of the most important business lessons for budding entrepreneurs, the dangers of falling in love too soon.

Thursday, 17 October 2013

Billy's First Law: The Myth of Self-Employment

The Myth of Self-Employment

You’ve got to serve somebody.

Bob Dylan

There is no such thing as self-employment.  You may have to write your own paycheck and you might not make minimum wage, but everybody works for the customer!  In the years I have worked in the field of entrepreneurship, I have noticed that the reasons that people want to start a business are usually self-centered.  They want to make a lot of money they, want to have independence; they don’t want to take any crap from an anally retentive boss.  What ever it is, most people think of a business start-up from their own point of view.

Nobody out there cares about your former boss – your desire for self actualization or your need to have more quality time with your two cats.  Customers care about themselves.  Last time you made a purchase, did you think about how you are helping the business owner fulfil their dreams?  As I type this on Microsoft Word (which I actually purchased by the way) did I stop for a minute to think about how Bill Gates made a few more dollars?  Of course not.  I wanted good software to do word processing, presentations and spreadsheets.  Until that is actually available, I will use Microsoft Office. 

To paraphrase Bill Clinton “It’s the customer stupid!” What do customers want – or what will customers want. They either already know they want what you have to offer or you have anticipated what they will want in the future.

When you think in terms of starting a business, think in terms of they ways you can help customers.  It might be what they buy-- how they buy -- or where they buy. Everything depends on your ability to make enough customers happy to allow your business to succeed. 

I was doing an entrepreneurship workshop and doing my usual rant about the customer when one of the participants burst out in frustration, “You make it sound like we aren’t even starting this business for ourselves.”   “That’s right.” I said, “You start it for your customers!”
This week’s quote is from Theodore Levitt of the Harvard School of Business.

The purpose of a business is to create and keep a customer.  

Wednesday, 16 October 2013

Common sense business ideas, with a dash of humour.

Hi, I’m Bill Erichson and welcome to my blog.  It’s all about small business, especially trying to succeed in starting, growing and surviving in your business.  I base my writings on my years of experience as a business trainer, consultant and general observer in the small business scene. 

As time goes on, and if I don’t get bored, you I will post up several of ‘Billy’s Laws of Business’.  For the incredibly naïve of you, these are neither statutory laws nor laws of nature.   They came as a result of a little presentation tip I use in business seminars.  If I want to illustrate an important point… or at least a point I think is important, then I say “As Billy’s Law clearly states…”  It was really just a way of drawing peoples’ attention back to the seminar.  One day, somebody asked me if I had written them down anywhere.  That gave rise to my ‘laws of businesses’ and to this blog.

Please don’t take these laws too seriously.  In fact, my experience shows that for every rule, there are exceptions and that business rarely black and white, but rather found in shades of grey…at least fifty of them.  (If you are not a bit of a smart ass…you may not like what you read.)

Please don’t expect an academic treatise or proper footnotes.  If there are fewer than five spelling mistakes per post it will be a miracle…and that’s with a spell check.  I will make general references to the myriad of material I have stolen through the years and even make the occasional book recommendations, but the homework is not mandatory.

In case you haven’t noticed, I am a bit of a smart ass.  Although I don’t take myself too seriously, I take your businesses seriously.  I want all of you (all-ya’ll as they say in Georgia) to succeed.  The real reason for this blog, and for my laws of business is to get people to think.  Thinking is dangerous as thinking leads to ideas which lead to change which lead to progress.  But we live in a world of change, and these changes lead to challenges.  As small business owners, must stay sharp and thinking.  So here is a quote to get you thinking until I post up the first law…the Myth of Self-Employment.  I heard if on a BBC Podcast.

Big Businesses survive change with their size…Small Businesses survive change with their strength.

Be strong.